Options exchange – what is it?
Every type of security must be under full control of regulatory bodies and legal standards. For this, there are non-profit organizations that provide conditions for the legal trading of securities. These are usually large institutions that handle all types of contracts, but there are also specialized ones — such as an options exchange.
What Is an Options Exchange?
An options exchange is a non-profit organization created to centralize and localize the trading of options in one place. These organizations often also deal with futures and forward contracts.
Sometimes the term “exchange” is confused with the “options market.” The exchange is a part of the options market — its standardized part — but the market itself can exist outside the exchange. For example, large option deals, especially between experienced parties, are often made outside official exchanges. In such cases, the option is part of the market, but not of the exchange.
Another difference is that an options exchange operates under the laws of its country, while the market as a whole is governed by global standards.
Chicago Board Options Exchange
The first exchange dedicated solely to trading options and futures was the Chicago Board Options Exchange (CBOE), founded in 1973. It is a subsidiary of the world’s largest commodity exchange — the Chicago Mercantile Exchange.
The launch of this exchange marked a new chapter in the history of options, as for the first time this financial instrument received dedicated institutional attention. Today, 51% of all U.S. options are traded on this exchange — and its share in the global market is also significant.
The main specialty of CBOE is index options trading. A stock index reflects the price of a basket of securities. Currently, the exchange offers about 40 types of index option contracts and accounts for 91% of all such trades worldwide.
European Options Exchange
Looking ahead, it should be noted that this organization no longer exists since 1997, but it’s still worth mentioning because dedicated options exchanges are quite rare.
It was established five years after the Chicago exchange, in 1978, in Amsterdam, Netherlands. Interestingly, this country is also the birthplace of the first options — in the 1630s during the tulip mania. At that time, small entrepreneurs issued options to raise funds for opening flower shops. In a way, these options resembled early-stage company shares.
In 1997, the European Options Exchange merged with the Amsterdam Stock Exchange, which itself later underwent significant changes.
Today, the largest options trading platform in Europe is the London Stock Exchange.